Keynes’s Macroeconomics Rethought
Chapter 2: Money, Price, and Interest
Magnum aliquid est commercium illud reconditum, atque implexum, quo humana Respublica, pecuniae occulto gyro, non secus, ac sanguinis circuitus, florens atque incolumis perpetuo servatur. Sed hujus circuli naturam explorare difficillimum est, nec aliter possumus, nisi quaedam ponantur geometrarum more, ex quibus doctrinae ratio, & rei summa certis limitibus coerceatur. (Ceva 1711)1 Il [Locke] a bien senti que l’abondance de l’argent enchérit toute chose, mais il n’a pas recherché comment cela se fait. La grande difficulté de cette recherche consiste à savoir par quelle voie et dans quelle proportion l’augmentation de l’argent hausse le prix des choses. (Cantillon 1755; 1931, p. 161)2 For Keynes,3 money was not just a medium of exchange. It has implicit characteristics that differentiate it from its conception by the quantity theorists to yield the Quantity Theory of Money. In Keynes’s model, that theory is described simply as an extreme, special theoretical case of money. The Quantity Theory of Money, as expressed in the equation of exchange, widely used by economists, might, he thought, be a useful tool and classroom device for explaining a fictitious monetary equilibrium in a static state, but in a dynamic theory and in relation to the real world, he felt it did not say much. Fundamentally, the matter turns on two questions, posed in the simplest terms: (1) is there a one-to-one, unique relationship between changes in money and changes in price level and (2) does variation in money filter into the economy through the interest rate to impact the...
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